Silver Regains Its Feet

August 23, 2013 at 09:12

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After months of heavy selling, the price of silver is finding its feet, a reflection of improving demand for the metal from both the industrial and investment sectors, say market watchers.

Silver prices are up around 26% from the near three-year low silver hit during a broad rout in commodities markets in late June. Gold, by comparison, has recouped 16.5% of its June slide.

HSBC recently lifted its price outlook on silver, increasing its forecast of the average price for 2013 to $22.90 an ounce from $21 an ounce previously.

Renewed demand for silver, the result of an improving economic outlook, is playing a large part in silver’s comeback, analysts and investors say. Unlike in the market for gold, which is used mainly as an investment tool and for jewelry, industrial demand plays a significant role in setting the price of silver, which is used in everything from consumer electronics to solar panels.

A string of positive economic data from some of the world’s largest economies have encouraged investors in recent weeks. Reports from China, the world’s top metals consumer, have suggested that economic growth is picking up after slowing down in the first half of the year. The euro zone clawed out of its recession during the second quarter, and initial U.S. claims for unemployment benefits last week hit the lowest level since 2007.

“Silver is a mix between a quasi-precious metal and an industrial metal. The fact that that industrial use is picking is an important element that has led to silver’s strength recently,” said John Hummel, president and chief investment officer of AIS Group, an investment-management company.

Mr. Hummel has been betting more heavily on silver in recent months. He has roughly doubled the exposure of AIS’s $200 million Multi Asset Allocation Portfolio to silver futures to between 18% and 26%.

Other investors are also seeing value in the metal.

Exchange-traded fund investors have been snapping up silver in recent weeks. Global holdings of silver ETFs hit a record high of 644 million ounces this week, according to data from Bloomberg. So far this year, silver ETF holdings have risen 5.8%. Gold ETF holdings, meanwhile, have fallen 26% in 2013, and hit a near three-year low at 62.6 million ounces this month, the lowest since November 2010.

“To the extent that U.S. ETF investors hold a strong positive view on the economy, the diverging flows for gold and silver holdings are certainly understandable,” said UBS analyst Joni Teves. “Ultimately the white metal should benefit from a pickup in economic activity [and a] recovery in industrial demand would be a catalyst for silver to rebuild [its] investor base.”

Investors have also been snapping up silver coins. The U.S. Mint has sold around 32 million ounces of silver coins in 2013 so far, just short of total sales for the whole of 2012. If buying continues at its current pace, sales are likely to exceed the record of 40 million ounces set in 2011.

“Commercial demand appears to be turning around,” said Mike McGlone, director of U.S. research at ETF Securities.

Greater demand from India should also support silver prices in the months ahead, according to James Steel, a metals analyst at HSBC. “Indian imports are robust, where silver demand seems to be benefiting from government policies aimed at constraining gold demand,” he said.

Silver’s price is also benefiting from supply-side pressures, said Clive Burstow, who manages Baring Asset Management’s $11.3 million Global Mining Fund.

“Silver is principally a byproduct of copper mines and lead and zinc mines,” said Mr. Burstow. “Pure silver mines tend to be located in parts of the world like Latin America where it is both politically and geographically difficult to grow production. There are some very good fundamentals behind silver,” he said.

Mexico was the world’s top silver- producing country in 2012, followed by China, Peru, Australia and Russia.

Baring’s Global Mining Fund currently has 3% exposure to silver-mining stocks.

Still, there are risks to silver’s rally. “The price swings in silver are normally very strong so I wouldn’t be surprised to see some profit-taking after the strong gains,” said Eugen Weinberg, head of commodities research at Commerzbank.

Moves in the gold market also may affect silver. As the U.S. Federal Reserve has printed money to stimulate the economy in recent years, investors have scooped up gold, and also silver, as protection against debasement of the currency and inflation.

If the Fed lays out a clear schedule for scaling back its bond-buying program, gold could come under pressure, hurting silver, Mr. Burstow said. The minutes from the latest meeting of the Fed’s rate-setting committee, made public on Wednesday, made it dear that the central bank intends to move, but left investors on the hook about when, or how aggressively.

“Silver is gold on steroids. If the gold market takes a particularly big step backward then silver will naturally go with it,” said Mr. Burstow.